Notes of interest from the FY05 Q3 Apple conference call

Apple posted a net quarterly profit of $320 million, or $.37 per diluted share, and revenue of $3.52 billion. These results compare to a net profit of $61 million, or $.08 per diluted share, and revenue of $2.01 billion in the year-ago quarter, and represent revenue growth of 75 percent and net profit growth of 425 percent. Gross margin was 29.7 percent, up from 27.8 percent in the year-ago quarter.

Mac sales during the quarter grew at 3 times the market average, representing the highest quarterly Mac sales in over 4 years. It was also the highest ever level achieved during a June quarter.

Below are some other notes of interest from the conference call with Apple CFO Peter Oppenheimer and vice president Tim Cook:

Sales and unit shipment breakdown

Apple shipped a total of 1,182,000 Macs during the quarter, including 687,000 desktops and 495,000 portables (a new quarterly record). This represents 65% year-over-year growth for desktops and 8% growth for portables. Desktops combined to deliver $845m in revenue while portables added another $720m.

A total of 6,155,000 iPods shipped during the quarter, accounting for over $1.1b in revenue. Year-over-year this represents a 616% increase in unit shipments and a 343% increase in revenue. From the previous quarter, iPod unit shipments rose 16% with revenue growing 9%.

Apple's "other music products" added another $241m in revenues, a 230% year-over-year increase. Compared to the previous quarter, this segment grew 12%.

Peripherals and other Apple hardware sales brought in $266m in revenue, a year-over-year increase of 21%. However, this figure represents a 5% sequential decrease in sales from the previous quarter.

Software sales, largely fueled by the release of Mac OS X 10.4 "Tiger," grew 21% year-over-year to $345m or 44% from the previous quarter — the highest quarterly software sales in company history.

Geographical and Retail revenue breakdown

In the Americas, Apple shipped a total of 595,000 Macs representing nearly $1.74b in revenue. Year-over-year these figures represent an increase of 26% in unit shipments and 71% in revenue.

International sales accounted for 39 percent of the quarters revenue.

Apple shipped a total of 283,000 Macs in Europe, a year-over-year increase of 48% in unit shipments and 82% in revenue.

Apple was "unhappy" with Mac sales in Japan, which dropped 7% year over year. The company said it will continue to make changes to its direct and indirect Japanese distribution channels.

Apple saw "no obvious reduction" in demand for current PowerPC Macs in the three weeks following its announced transition to Intel processors.

95% of Wal-Mart stores are now carrying the iPod. Apple is investigating whether to expand to the retail giant's international locations.

Apple ended the quarter with 25,000 storefront distribution points for the iPod world-wide, an increase from 21,000 distribution points from the end of the previous quarter (primarily due to the addition of 3,500 US-based Wal-Mart locations).

Sales of Mac OS X "Tiger" added about $100m in revenue to Apple's quarterly results. Best selling release in company history. The install base of Mac OS X is now close to 16 million.

According to recent NPD Techworld data, Apple's iPod holds an approximate 75% of the entire MP3 player market in US. The next closest competitor to Apple holds less than a 5% share.

Apple's iTunes Music Store accounts for an 83% share of legally downloaded music. The store operated at above break-even during the quarter.

Apple ended the quarter with 4-5 weeks of Mac channel inventory, in range with the company's expectation.

Apple ended the quarter with 4-6 weeks of iPod inventory, also inline with expectations.

Gross margins during the quarter were higher than expected primarily due to strong sales of Mac OS X Tiger and Final Cut Studio.

Gross margins are expected to decline slightly during the current quarter due to a fall-off in sales of the two aforementioned software products.

Gross margins for iPods for Q3 were close to 20%. Apple hopes to keep iPod gross margins at about 20%.

Over two million copies of Tiger shipped by early June. Apple then shipped "several hundred thousand" additional copies of the OS with new Mac purchases.

Apple opened 7 retail stores during the quarter, bringing its total to 110 stores. The company reiterated its expectation of operating 125 stores by year's end.

Retail traffic rose to over 12 million for the quarter, or about 8,900 visitors per store each week.

Each retail store averaged about $5.3m in sales, up from $3.4m during the year-ago quarter.

Apple achieved the highest educational Mac revenue during a quarter in over nine years. Both revenue and Mac unit shipments rose 16%. K-12 sales grew 8%.

HP iPod shipments accounted for 8% (??) of total iPod shipments during the quarter.

The tax rate for the quarter was 32%, as expected. Apple expects the same rate for the current quarter.

During Q3 Apple saw a decrease in DRAM and flash prices. However, Apple expects commodity prices to increase during the current quarter due to typical industry trends and demand. The company is also forecasting higher than originally expected storage component prices.

Apple now holds over $7.5b in cash.

Apple is guiding earnings of 32 cents per share on revenues of $3.5 for the current quarter.

I'm interested in knowing the reasoning of holding on to so much cash. They're probably not debt free so they must be earning more on their cash than they are losing on their debt. Does a company of Apple's size, I guess that's a good measuring stick, usually have 7.5b in cash?

Originally posted by fahlmanI'm interested in knowing the reasoning of holding on to so much cash. They're probably not debt free so they must be earning more on their cash than they are losing on their debt. Does a company of Apple's size, I guess that's a good measuring stick, usually have 7.5b in cash?

They are debt free. No long term, and as far as I know still no short term.

Originally posted by fahlmanI'm interested in knowing the reasoning of holding on to so much cash. They're probably not debt free so they must be earning more on their cash than they are losing on their debt. Does a company of Apple's size, I guess that's a good measuring stick, usually have 7.5b in cash?

I believe they went debt free a couple of quarters ago... they mentioned they are holding the cash for investments and acquisitions but wouldn't go into detail... Apple's cash sum is impressive for the company's size.

Originally posted by KasperI believe they went debt free a couple of quarters ago... they mentioned they are holding the cash for investments and acquisitions but wouldn't go into detail... Apple's cash sum is impressive for the company's size.

Best,

-K

And also remember that MS still has over $30 billion even after that large payout to their stockholders that they were "forced" to do by the investor community.

Originally posted by fahlmanI'm interested in knowing the reasoning of holding on to so much cash. They're probably not debt free so they must be earning more on their cash than they are losing on their debt. Does a company of Apple's size, I guess that's a good measuring stick, usually have 7.5b in cash?

Companies in the growth phase of the product life cycle typically retain earnings for future investment rather than make distributions.

Given the growth -- and potential for growth -- Apple possess, it is better for shareholders if Apple keeps its cash and invests it in growth projects, rather than make distributions to shareholders. Apple is just waiting for the right opportunity to present itself.

A large warchest also provides a buffer against short term volatility and any potential liquidity issues, although this probably doesn't require $7.5b.

Originally posted by ScepticCompanies in the growth phase of the product life cycle typically retain earnings for future investment rather than make distributions.

Given the growth -- and potential for growth -- Apple possess, it is better for shareholders if Apple keeps its cash and invests it in growth projects, rather than make distributions to shareholders. Apple is just waiting for the right opportunity to present itself.

A large warchest also provides a buffer against short term volatility and any potential liquidity issues, although this probably doesn't require $7.5b.

Apple has shown itself to be investment adverse if the investment is greater that a few tens of millions, or isn't an investment in a supplier to insure supply.

This is far better than I expected! Maybe the "I'm fed up with MS" attitude is stronger than expected.

The IPod results are surprising, but I still don't see that as a long term thing for the development of the company. Then agian I don't appreciate the music industry at all.

If anything this may be part of the reason that the Intel switch was announced when it was. Best to be in a strong position before scaring the hell out of your customer and developer base. Looks like Apples abiltiy to carry themselves through the transition is a lot stronger than expected.